So you’ve piled up a bit of cash in your brokerage account. Maybe you bought low and sold high, transferred funds from a bank, or haven’t reinvested your dividends. You’ve got cash—and this a good problem.
Before making plans for that little sum of green—which may be titled brokerage cash in your statements— you have to figure out what is yours to use immediately. Then you can have fun.
Key Takeaways
- Brokerage cash is a top-line cash total in your investing account. It’s the cash amount before stripping out items like unsettled trades and collateral.
- Not all of your brokerage cash is immediately available for trading or withdrawing. That would be a bottom-line number which may be called buying power, cash available for withdrawal, or something similar.
- Cash in these accounts can be parked to collect interest, reinvested, or withdrawn for paying bills.
Brokerage cash for some may be categorized as found cash—that surprise stash that piled up as you weren’t watching. Others might carefully nurture it, monitoring assets from stock sales, dividends, and transfers. You can let it ride and collect a bit of interest, take it out and spend it, or invest it.
Whatever you choose, you have to know what’s yours to spend. And brokerage cash, as it’s labeled in the Robinhood app, isn’t necessarily available to spend at that moment. That’s because the brokerage cash line is a top-line number, meaning you have to strip out some things like funds from unsettled trades and collateral before arriving at a sum that you can spend. Brokerage cash is a tricky number; it’s not the same as money in your wallet.
Keep looking in your account and you’ll find the true bottom line, the amount you can spend immediately. Schwab calls it “cash available for withdrawal.”
Now that you know what’s yours, the time is here to figure out what to do with it. What you do of course depends on factors like how much you have in that bottom-line account as well as your immediate needs—like bills or vacations—and long-term requirements or time horizon. Since everyone’s needs are different, the following are some rough guidelines for what to do with your brokerage cash.
Buy More Stocks, Bonds, ETFs
If your appetite for risk means that you can afford short-term dips in pursuit of long-term gains, then keep investing for growth. If you make a gain on a stock sale, then put it back into the market. If you’re getting dividends, opt to have them reinvested, and they won’t pile up in your brokerage account.
Put the Cash in a Short-Term Debt Instrument
Do you think you’ll need the money soon? But not immediately? Some financial experts recommend putting your brokerage cash into a so-called ultra-short bond fund. Ultra-short bond funds hold fixed-income securities that typically mature in less than one year and pursue higher yields by investing in riskier securities than traditional bond funds. In high-interest-rate environments, ultra-short bond funds of certain types may be extra susceptible to losses.
Leave It Alone
You can let it sit. Yes, keep your powder dry. It will be there when you need it. In most cases, it’ll be swept into an FDIC-insured account. Still, the problem is you’ll earn interest equivalent to that of a bank savings account. Pretty crummy, but it’ll be there.
Spend It
Most brokerages will let you pay bills with your brokerage cash. Charles Schwab, Interactive Brokers, and many others permit this, and you just need to set up a payment account. Or spend it on your vacation, or get some nice shoes. Go ahead—it’s your money.
What’s the Difference Between Brokerage Cash and Buying Power?
Brokerage cash is a top-line cash total in your investing account. It’s the cash amount before stripping out items like unsettled trades and collateral. Buying power is the bottom-line amount of cash available to you immediately. It might be called “cash available for withdrawal” or some variant on that.
What Are Some Examples of Low-Risk Things To Do With Brokerage Cash?
Investors can leave the money where it is and it will earn a tiny rate of interest similar to that of a bank savings account. Still, it will be insured if it’s swept into an FDIC-covered account. Ultra short-term funds are another low-risk option.
Can Bills Be Paid With Brokerage Cash?
They sure can. Users just need to set up a cash management account with the brokerage.
The Bottom Line
Brokerage cash can be seen as found money—it might slowly accumulate over the years through dividends and stock sales. It can be reinvested or left alone to wait for the next investing opportunity. Another option is to set up a cash management account and pay bills with the cash. Or have some fun and go on vacation!
Read the original article on Investopedia.